Stocks have made it half-way back to the April highs. I think we'll make it all the way back this year.

That doesn't strike me as an especially heroic or bullish position. At this point, all that it would require is a roughly 8% rally. Stocks would finish 2010 with about an 11% gain, including dividends. That's a bit above the long-term historical average, but nothing spectacular.

Last week, I said I thought the correction in stocks was over. I got quite a few emails from readers asking me how I could say such a thing, considering that the economy is falling back into recession or that it never truly got out. The answer is simple. The recession is over. It's been over for at least a year. And we're not about to fall into a new one.

I'm not saying we're in a rip-roaring growth phase. One look at Friday's jobs report will tell you we're not. We're growing very slowly, but we're growing.

The economy lost of 131,000 jobs in July, but if you strip out the loss of 143,000 temporary Census workers (and other government job losses), you'll find the private sector added 71,000 jobs last month. More people have real jobs this month than they did last month.

That's good -- but not great. And this economy is good -- but not great, but also not bad. That's good enough for more gains in stocks.

For corporate earnings to grow a lot, the economy needs to grow only a little. Just look at earnings for the S&P 500, which have bounced back 56% from their recession-era lows. In October 2009, the trailing four-quarter operating earnings for S&P 500 members were $442 billion. Now, they're $690 billion. However, the overall economy, as measured by gross domestic product, has grown only 1.9% from the lows. (By the way, I'm not adjusting earnings or GDP for inflation.)

How can the S&P 500 squeeze a 55% earnings gain out of only 1.9% growth in the economy? You could ask the same question about the downside, in reverse. During the recession, GDP fell 2.1%, but S&P 500 earnings fell 46%. There are two main reasons for this seemingly strange phenomenon.

First, companies can experience outright losses, while the worst that can happen to GDP is that production is reduced. Much of the S&P 500's drop in earnings was attributable to losses in the financial sector, mostly from write-offs of bad loans and bad investments in so-called "toxic assets." While overall earnings were reduced by $248 billion from their August 2007 peak to their October 2009 trough, the S&P 500 financial sector took a $277 billion swing, from profits of $222 billion to an outright loss of $54 billion.

When the losses are over, earnings march forward. From October 2009, the financial sector has swung back $141 billion, from that $54 billion loss to a profit of $86 billion. That leaves another $109 billion in profit growth attributable to the rest of the S&P 500.

And that brings me to the second reason why corporate earnings swing so much more violently than underlying economic growth: Companies are leveraged to the economy. I mean this in two ways. First, I speak of "financial leverage," in which companies finance themselves with debt, allowing them to conduct larger operations on the same equity base, thus reporting larger gains or losses than they would otherwise. Second, I refer to what analysts call "operating leverage."

To see how operating leverage works, consider an airline. During the good times, it had to buy more planes to compete and meet the demands of a growing number of travelers. When the recession struck, people stopped traveling, but the airline still had its fleet. Now, it has to pay to finance and maintain the planes, but there are no travelers to bring in sales. Profits turn to losses, even with a seemingly small decline in travel. However, once the economy recovers and people start traveling again, the airline hits the jackpot. It has all the planes just sitting there. Now, it can earn money on them, without having to pay to get them. That's operating leverage.

We're in that part of the economic cycle now. The economy still hasn't completely recovered -- by "completely" I mean that GDP hasn't risen back to its pre-recession peak yet. Businesses have a lot of idle airplanes, stores, factories and so on, just waiting to be brought back online when demand materializes.

Right now, GDP has to rise another 0.2% to get back to the old highs. Earnings have to increase a hundred times that, about 20%, to get back to their former peak. That's the ratio of operating leverage built into corporate America right now -- about a hundred to one.

From that perspective, it shouldn't be especially controversial to imagine the S&P 500 at least returning to its April highs by the end of the year.

That is -- unless you think the economy is about to fall into a double-dip recession, which would restart the dark side of the operating leverage cycle. That's a judgment call, but I don't see it happening. Interest rates are low, and I'm confident the Federal Reserve will do more to keep them low for a long time. Housing prices and stock prices have begun to recover, restoring household wealth. At the same time, households have already shed over $400 billion in debt over the last four years. Higher wealth, lower debt -- that's the formula for continuing economic stability and growth.

There's no reason to get wild-eyed bullish here. All the wild-eyed stuff I see out there is from the bears. It seems like America's biggest export industry now is pessimism. Personally, I've had all the pessimism I need for a lifetime already. Right now, "good -- but not great" is good enough for me.